Date post: | 03-Jan-2016 |
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Average and Marginal Propensities to Consume and Save
Average Propensities
APC = C/DI APS = S/DI since DI = S + C APC + APS = 1
Marginal Propensities
MPC = ∆C/∆DI MPS = ∆S/∆DI Since DI = S + C ∆DI = ∆S + ∆C MPC + MPS = 1
Nonincome determinants of consumption and saving
Wealth Borrowing Expectations Real interest rateOther important considerations Switching to real GDP Change along schedule Simultaneous shifts taxation
What Shifts the Investment Demand Function?
Acquisition maintenance and operating costs.
Changes in taxes on business Technological Improvements Stock of capital goods on hand Planned inventory changes Expectations Instability of investment.
Multiplier effect
A change in spending, say investment ultimately changes output by more than initial change in investment spending. That surprising result is called multiplier effect.
Multiplier = change in real GDP /initial change in spendingOR change in real GDP = Multiplier*initial change in spending
The AE multiplier
M = 1/(1- MPC) = 1/MPS M = change in real GDP/change in
spending M = ∆GDP/∆AE = ∆Y/∆AE Change in AE can come from any
component of aggregate expenditure
AE = C + Ig + G + Xn